Who will—and won’t—benefit from student loan aid

Students look on as U.S. President Barack Obama signs a Presidential Memorandum on reducing the burden of student loan debt in the East Room on the White House in Washington, D.C

Zeroing out a student loan balance can seemingly take a lifetime, and not all borrowers will see their timelines—or costs—shortened by President Barack Obama's executive action on student debt relief.

The White House announced that the president is expected to sign an order Monday to expand eligibility for income-based repayment plans. Under current federal law, many borrowers are able to cap the payments on their federal loans at 10 percent of their monthly income, with any remaining debt forgiven after 20 years in repayment. This order would expand that program in December 2015 to include borrowers whose loans predate October 2007 and those who stopped borrowing by October 2011.

By the administration's estimates, the expansion will aid more than 5 million borrowers through the Pay As You Earn program, available since 2012 to select borrowers. Another 1.2 million borrowers are currently expected to qualify under the Health Care and Education Reconciliation Act's income-based repayment program, which takes effect for new loans on July 1. Single borrowers earning $30,000 per year and carrying a student loan burden of $20,000, it said, would see their monthly payments lowered by $110 in that program.

Most graduates owe far more. The class of 2012 graduated with an average $29,400 loan balance, according to the Project on Student Loan Debt.

"I'm sure this will come as welcome relief," said Joseph Hurley, a certified public accountant and chief executive of Savingforcollege.com. "Certainly graduates who go into lower-paying occupations, public service—they are still struggling with that debt."

Default rates on student loans have continued to increase; last year, the Department of Education announced that the percentage of recent graduates who entered repayment and then defaulted within two years was 10 percent in 2010, up from 9.1 percent in 2009. That's the highest rate since 1995.

The expansion also provides some simplification for borrowers, who might currently qualify for one of four different income-dependent repayment options, depending on the nature and timing of their loans. "It's clear that more borrowers need to know about their options," said Lauren Asher, president of the Institute for College Access and Success. Some programs have caps as high as 15 or 20 percent of discretionary income,with forgiveness after 25 years—less generous than what would be on offer under the president's executive action.

But the program won't benefit everyone. Qualifications also tend to focus on borrowers with an imbalance between what they earn and what they owe, said Mark Kantrowitz, publisher of Edvisors Network. "If your total debt exceeds your income, you will probably benefit," he said. "If your debt is in sync with your income, you probably won't."

To qualify for the program, borrowers must have a "partial financial hardship," meaning their income qualifies them for a payment that would be less than that required under a standard 10-year repayment plan. Income-based payments are based on your discretionary income, defined as the amount of adjusted gross income exceeding 150 percent of the poverty level. By the White House's estimates, that's currently about $16,500 for a single taxpayer.

A second big loophole: Private loans aren't covered. Almost 1.4 million undergrads—6 percent—took out a private loan during the 2011-12 academic year, according to the Project on Student Debt. That's down from 14 percent of undergrads who took out private loans during 2007-08.

Even those borrowers who are eligible for the program may find that it results in bigger bills overall. Income-based repayment plans reduce the monthly payment, but also spread out payments over a longer period of time, adding interest costs and boosting the total amount that must be repaid, said Eleanor Blayney, a certified financial planner and consumer advocate for the CFP Board.

"If people use this program as a way of sending their debt off into the future, they're not going to like what they meet in the future," she said. Borrowers may find themselves still paying off loans while juggling a mortgage, saving for retirement and planning to send their own children off to college.

A higher total to be repaid also means a bigger remaining balance when it finally comes time for loans to be forgiven. "IRS treats forgiveness of debt as income," said Kantrowitz. Borrowers could face a hefty tax bill—especially if their debt amount was so high and monthly payments so low, that they owe nearly as much as they started out with, he said. (The exception: Public service workers, whose loans are forgiven after 10 years, are not taxed on the transaction.)